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Fast and Slow Informed Trading

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  • Rosu , Ioanid

Abstract

This paper develops a model in which traders receive a stream of private signals, and differ in their information processing speed. In equilibrium, the fast traders (FTs) quickly reveal a large fraction of their information, and generate most of the volume, volatility and profits in the market. If a FT is averse to holding inventory, his optimal strategy changes considerably as his aversion crosses a threshold. He no longer takes long-term bets on the asset value, gets most of his profits in cash, and generates a "hot potato" effect: after trading on information, the FT quickly unloads part of his inventory to slower traders. The results match evidence about high frequency traders.

Suggested Citation

  • Rosu , Ioanid, 2016. "Fast and Slow Informed Trading," HEC Research Papers Series 1123, HEC Paris.
    • Handle: RePEc:ebg:heccah:1123
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    File URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1859265
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    Cited by:

    1. Peter Bank & Ibrahim Ekren & Johannes Muhle-Karbe, 2018. "Liquidity in Competitive Dealer Markets," Papers 1807.08278, arXiv.org, revised Mar 2021.
    2. Breedon, Francis & Chen, Louisa & Ranaldo, Angelo & Vause, Nicholas, 2023. "Judgment day: Algorithmic trading around the Swiss franc cap removal," Journal of International Economics, Elsevier, vol. 140(C).
    3. Arifovic, Jasmina & He, Xue-zhong & Wei, Lijian, 2022. "Machine learning and speed in high-frequency trading," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).

    More about this item

    Keywords

    Trading volume; inventory; volatility; high frequency trading; price impact; mean reversion;
    All these keywords.

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